get the transponder checked and calibrated if need be. they should be done regularly, and are for IFR category aircraft, i had a similar story but in Sydney control zone, and the erroneous transponder data caused an advisory warning to a B737 on approach to Sydney, i was at 500ft tracking under the approach path of runway 16 at Sydney, about 5 miles from the end of the runway, but the transponder readout said i was at 2000ft, right in front of the B737 on finals. my response to ATC was to confirm i am at 500ft, and i had the 737 visual, the 737 crew confirmed to the tower they had me visual as well at what appeared to be 500 ft. i told the tower i will turn off the transponder if they wanted me to, they asked me to turn it off, and not fly in CTA until it was checked.
Once back at bankstown, i found out the aircraft was recently painted, and the transponder antenna removed and the hole masked over for painting. when the paint was done, the transponder antenna was reinstalled without the masking tape being removed. we found this out after we removed the antenna on my return, and found the hole full of chewed up masking tape.
sure enough, once the tape was removed, calibration found the transponder was fine.
in your case, i would check the transponder is plumbed to an external static source. and if so, its not leaking, as this to can cause some errors in reporting altitudes.